MONEY retirement income

How You Can Get “Peace of Mind” Income in Retirement

Bucket of Money
Colin Anderson—Getty Images

More investors are using a "bucket strategy" to provide retirement income. But if you do it wrong, you could put your portfolio at risk.

For pre-retirees seeking steady income in retirement, one of the most popular options today is a so-called bucket strategy. And for good reason. Retirees like the security it offers. But bucket strategies can differ widely—some work well, while others, not so much. In fact, one version of this approach could lead you into a retirement trap.

I’ll tell you the best way to use a bucket strategy and how to avoid missteps. But first, here’s how buckets work:

In the simplest form of this strategy, your investments are divided into two portfolios or buckets. The first holds enough fixed-income assets, such as money market funds, CDs and bond funds, to finance the first 10 to 15 years of withdrawals. The second invests the remaining funds in equity assets, typically stock funds and individual equities, which are intended to replenish the first bucket and finance your later retirement years. Sometimes these two buckets are subdivided, so you might have four or more buckets, but the overall strategy and structure remain the same.

Retirees, understandably, value the peace of mind of a bucket strategy. Their first years of retirement income are tucked away in guaranteed or relatively stable assets that aren’t subject to stock market volatility. They also take comfort knowing that poor equity returns in their early years of retirement won’t affect their future income, since there is time for their second bucket to recover.

You should realize that this same peace of mind could be achieved without designating buckets. A retiree who diversified her nest egg into the same fixed income and equity mix, and who likewise began drawing income from the fixed-income portion, would end up with the same result. Interestingly, there is no published research that a bucket strategy increases either the success rate, ending value or sustainable withdrawal amount, assuming the choices for initial allocation, rebalancing and withdrawals are the same. In reality, a portfolio—however organized—can do no more and no less than the sum of its parts, as shown here.

Another reason that buckets are a bit oversold: the major risk that they are designed to protect against—an early bear market—is often exaggerated. Many retirees could make small adjustments to their spending, while keeping their retirement assets in the same investment mix, and do just fine. Both a recent article and some research from last year addressed how overblown this risk can be when evidence-based decision rules about withdrawal amounts and portfolio allocation are used, buckets or no buckets. That said, however, for many retirees, the psychological comfort of a buckets framework is valuable.

About that trap: if you set and forget those buckets, you could put your portfolio at risk. Say a retiring couple has a $500,000 nest egg and wants to withdraw 4%, or $20,000, in the first year, with annual inflation increases. Using a simple two-bucket strategy, they would put 12 years of income, or $240,000 in the first bucket. This would hold fixed-income assets with yields that would match inflation—but no more—to minimize risk. The remaining $260,000 of their portfolio is invested in U.S. and foreign stock funds.

Now let’s assume that they put their plan on autopilot and let things run their course for four years. By 2018 their $240,000 “safe” bucket stands at $173,000, which will last another eight years. And the $260,000 in equities? Consider three possible four-year scenarios:

*Bad start, with -6% annualized returns (worse than both 2000-03 and 2008-11): their second bucket falls to $203,000 and comprises 54% of total assets.

*Low but positive start, with +3% returns: equities are $293,000 or 63% of the total.

*Good start, with +9% returns (the historical average): equities grow to $367,000 or 68% of the total.

The trap? By failing to rebalance regularly, the couple is very likely to see their portfolio’s stock portion soar, which will make it far more volatile—even with a 3% return, stocks grow to 63% of their nest egg in just four years. Clearly, waiting 12 years to replenish your fixed-income assets would be dangerous and foolish.

Of course, rebalancing, which requires you to trim your winning investments and buy more of the laggards, can feel counterintuitive. But what if the bad-start scenario had gained 30% after two years before falling 40% in the next two (-6% annualized return)? Retirees who refilled after Year 2 would have 5% more total assets after the crash. Or imagine the low-positive case that now has markets at all-time highs amid concerns they are overvalued. And what if Year 5 of the good-start began with a 20% correction?

The key to avoiding the trap is to review your portfolio annually, however many buckets you hold. Choose allocation rules and withdrawal policies to guide your responses to what you find. And if markets are severely out of whack, that’s an opportunity to rebalance—either by replenishing the safe bucket to the 12-year income level that was so comforting to begin with or by putting more money in bargain-priced stocks in the second bucket. Then the peace of mind that your retirement income plan provides can truly be well-deserved.

Jonathan Guyton, CFP is a nationally-recognized financial planner and a retirement columnist for the Journal of Financial Planning. A Principal at Cornerstone Wealth Advisors, a fee-only advisory firm in Minneapolis, he can be reached at

MONEY retirement income

Retirement Income: Five Steps to a Sound Plan

You want to be sure that your income will last throughout retirement. A financial planner offers key guidelines.

The moment you announce your retirement is a big deal. Few voluntary life transitions—besides marriage or having children—can match it. So before you tell your boss that you’re calling it a career, it’s important to make sure your retirement income plan is really ready.

My advice is based on the growing body of research about generating a sustainable retirement income. Some of this is my own published research, including the first-ever study to show how higher safe withdrawal amounts are possible—if you can be a bit flexible in your spending following years with especially poor investment returns.

And I’ve also learned a lot from watching dozens of our clients implement this advice to achieve a comfortable retirement. Based on this research and experience, I’ve come up with five guidelines to help you get ready to tap your nest egg:

1) Set a sustainable income target. To meet your core expenses, including health care and taxes, you’ll need a regular stream of payments that will increase with inflation. Start by detailing your core retirement spending needs, then determine the portfolio withdrawal rate it will take for your assets to fund them. Make sure your plan is based on solid research and your level of spending flexibility.

2) Get the most out of Social Security. If you’re married and one of you is in good health, try to wait till age 70, when you can file for the largest possible benefit. Otherwise, you may be leaving tens of thousands on Uncle Sam’s table. Remember that the bigger check is what the surviving spouse keeps regardless of who dies first. To make this strategy work, you may have to tap other income sources to fund your spending while you wait.

3) Choose the right asset allocation. Holding too little in stocks can be even more costly than holding too much—that’s because equities are likely the only assets able to generate the long-term returns needed to sustain your retirement income. Make sure you’re well-read on the recent research that’s been published on navigating the inevitable market ups and downs. Yes, stocks are risky, but even the recent market crash didn’t sink most plans unless you panicked at exactly the wrong time.

4) Be smart about taxes. Your current tax bracket matters a lot less than your bracket when you or your heirs take IRA distributions. A good strategy can be to spread out these withdrawals so their taxation can occur at lower federal tax brackets. Delaying can cause higher taxable amounts that may push your into much higher brackets. In 2014 singles are taxed at just 10% on their first $9,075 of taxable income after deductions; for married couples filing jointly, it’s $18,150. Rates then rise to 15% until $36,900 for singles and $73,800 for married couples. The next bracket jumps to 25%. In years when your income is low, take full advantage of the opportunity by doing Roth conversions in modest amounts that won’t trigger a move up in brackets.

5) Leave room for splurges. You don’t want to jeopardize your financial security, but you want to enjoy your retirement too. Set aside 5%-10% of your nest egg as a discretionary fund for that trip to Paris or seasons tickets to your local team’s games. That way, you can have your fun and still avoid poking dangerous holes in your retirement income plan with each extra “just-this-time” withdrawal.

Once you launch your retirement, you’ll want to keep tracking your spending and keep your plan on course. Consider setting up a withdrawal policy statement as a guide for the adjustments you may need to make along the way. Having these policies in place can help keep your emotions from getting the best of you during choppy markets or life’s upheavals.

If you found yourself confidently checking off these items as you read, chances are your retirement income plan is well on its way to being ship-shape. Bon voyage!


Jonathan Guyton, CFP is a nationally-recognized financial planner and a retirement columnist for the Journal of Financial Planning. A Principal at Cornerstone Wealth Advisors, a fee-only advisory firm in Minneapolis, he can be reached at

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